[Notes] Global & Local Economy Update: LFRA Forum

Properties & Pathways was invited to the LFRA’s (Large Format Retail Association) Victoria Forum on November 15. Speakers from two of the world’s largest financial institutions – Citi & HSBC – gave some captivating insights into both Australia and the globe’s economies.

Here are the key points from two eye-opening presentations:

Bryan Raymond, Senior Analyst, Citi

Retail Sales

There are signs of a slowdown in retail sales right now. But interestingly, consumer spending is outpacing income growth. This means Australians are dipping into savings. Larger retailers are the winners as a result, while smaller retailers are missing out on a piece of the pie.

K-Mart, JB Hi-Fi and Bunnings are clear winners of market share at the moment, while Target, Myers and David Jones are losing out.

Of the 48 ASX-listed retailers:

Half are growing their store count by 3% or more;

Two-thirds have rising gross margins;

58% have operating costs rising faster than sales;

Eight of 12 retailers have wage costs rising faster than sales.

Online penetration (excluding food) is 13% in Australia. Meanwhile, the US trend is approximately 14%.

Retail Spending

Retail spending growth is likely to be 3.5-4.5% (at best) over the next 12 months, which is slightly below trend. It’s important for retailers to focus more on managing costs – particularly the costs of wages.

The Australian economy is currently performing well, partially as a result of a good global economy.

Australia’s GDP and unemployment rate are the best they’ve been in 6 years.

2017 had the strongest global growth since the GFC at 3%.

The US economy is booming at 3.5%, which is well above average.

The US unemployment rate is at a 49-year low.

Two major risks:

Financial conditions in the US are tightening, which means other countries (who are buying in USD) need to watch the money/liquidity leaving their country;

Rising global trade tensions between the US and China is a big story. Australia is more aligned to China’s domestic growth story, so as China reorients its growth towards domestic infrastructure, Australia is perhaps benefiting.

Australia’s Story

Australia is driven by global trends. This is how:

Australia is a commodity-heavy exporter. High demand for commodities is driving national income. Meanwhile, Chinese environmental policy is aimed at increasing high-grade iron ore imports rather than low-grade domestic commodities.

Australia is exporting education (i.e. foreign students studying in Australia). This is the country’s third largest import, behind iron ore and coal.

Non-mining business investment is running at a high of 10%.

Chinese arrival numbers were 310,000 per year only 10 years ago. Now the annual arrivals are 1,500,000 (and growing at 20%).

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